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How do I Evaluate Foreign Investment Risk?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 04 December 2016
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Foreign investments are often attractive to domestic investors for a number of reasons. Investments of this type include just about every type of holding imaginable, including shares of stock, mutual funds, and bond offerings. The trick is to now how to compare and contrast various investments, assessing the degree of foreign investment risk before actually choosing to acquire any of these holdings. Along with the usual considerations such as the stability of the issuer and projections of future performance, it is also important to consider the general economic and political conditions related to the nation in which the securities are based.

As with any type of investing activity, part of assessing foreign investment risk involves looking into the background of the issuer, up to and including the current financial state of the company or entity that issues the stocks or bonds. Doing so makes it possible to determine if the backing for the asset is solid, or if there is some question about financial stability. In addition, investigating the past performance of the asset is also very important, since this helps the investor to understand how the asset has performed in different market situations. Knowing the past performance makes it easier to project how the asset will perform in the future, allowing for the occurrence of various events that impact the markets in which the holding is traded.

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Assessing foreign investment risk also means looking closely at what is happening in the country of origin. The general economy of that country will have some impact on the future business operations of the issuer. If there is evidence that the economy is about to enter some sort of downturn, care must be taken to determine how much impact that change would have on the value of the investment opportunity. The investor can determine if the shift in the economy will last long enough to have a detrimental effect on the investment, and if there is a good chance the investment would rebound and earn a significant profit once the economy recovers.

Along with the present and future state of the economy, evaluating foreign investment risk also involves considering the degree of political risk associated with the holding. Political shifts could undermine confidence in the issuer in some cases. At other times, a new political regime could also mean changes in foreign exchange rates that negatively impact the value of the asset, or even shifts in foreign withholding taxes in the country of origin or the home country of the investor. Understanding what could happen, and how that could impact the returns generated by the acquired asset, will make it much easier to determine if the foreign investment risk is worth it, or if going with a different investment opportunity would be a better decision.=

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